State Bank of India has cut its lending rates by a steep 0.9 per cent. That's good news for borrowers.
But depositors will soon have to brace for a similar steep cut in the interest rates they earn.
The one-year deposit in SBI currently earn 6.90 per cent. With the new lending rates at 8 per cent, the spread between their lending and deposit rate has shrunk from 200 basis points or 2 percentage points to just 110 basis points now.
SBI had cut interest rates on retail deposits by a marginal 15 basis points in mid-november. This was a little over a week after the demonetisation announcement on the night of November 8th. But its bulk deposit rates ( deposits of over 1crore to 10 crore) were brought down more steeply by about 175 basis points as money kept pouring in.
Credit growth in the banking system has been tepid so far. For the system as a whole, loans have grown just by 5.8 per cent over the past year up to December 9, 2016 compared with 10.6 per cent growth in the comparable previous period.
Deposit growth on the other hand has picked up to a level of 15.9 per cent in the one year up to December 9, 2016 compared with 10.9 per cent growth registered in the comparable previous period.
It is clear that banks are flush with funds. A cut in deposit rates looks quite likely in this backdrop.
SBI along with its associates accounts for about a quarter of the country's loans and deposits.